Saturday, May 16, 2009

Indian Madoffs flourishing under regulatory vacuum

MONEY still doesn’t grow on trees, but some enterprising businesses are promising just that. Well, almost. 
Investment schemes that sound too good to be true are fast mushrooming, offering to more than double your money by investing it in the retail, car leasing, resorts and cruise segments. 
This is when even top-rated fund managers are struggling to eke out measly returns in markets ravaged by the financial meltdown, and investors the world over are coming to terms with 
the after effects of the Madoff scandal, in which one of Wall Street’s top investment firms — the Bernard L Madoff Investment Securities — was exposed as a giant Ponzi operation. 
But Shree Om Sainath, City Group and Metro Cruise, three ‘investment companies’ that ET had a close look at, seem unfazed. 
With Shree Om Sainath, you can place an order for a brand new Tata Indica for just Rs 1.25 lakh. You will get your car only after five years, but until then, the company will pay you Rs 3,435 every month.

Regulators yet figure out how to monitor Ponzi schemes 

FOR a deposit of Rs 1.39 lakh, City Group, which has a dozen or so businesses, including City Limouzines, City Realcom and City Hospitalities, will give you Rs 8,800 every month for five years. Metro Cruise’s retail plan promises even higher returns: invest Rs 1.05 lakh, and collect Rs 12,517 every month for five years. 
As part of its realty schemes, the company is also promising to issue Metro Cruise preferential shares worth Rs 50,000-95,000 depending on the scheme. According to a marketing executive, the company has about 10,000 customers, and it offers 6% commission to anyone who gets a new client to invest in its schemes. As many of these schemes do not technically take public deposits, they escape the stringent guidelines of the Reserve Bank of India (RBI). But then, just how do these firms cook up such steaming returns out of nowhere? 

    
“We cannot give the recipe of our mutton curry to everybody,” says SM Masood, chairman of City Group. His marketing executive claims that the company has about one crore investors from across the country. Market experts fear that many of these schemes promising super returns may turn out to be so-called Ponzi schemes, named after 20th century US fraudster Charles Ponzi, where cash from new customers is used to meet demand from existing ones. 
    
And it’s not just the recipe, but the entire menu that needs to be closely monitored, add experts. But they are divided on who should be the one to monitor them. 
    
According to an RBI official, these companies do not fall under the central bank’s purview. 
    
Sharad Abhyankar of ANS Law Associates says that only public limited companies — and not private limited companies — are allowed to accept or invite deposits from public. “If any company is offering shares (equity or preference), debentures, or other securities, to the general public, such offers, or invitations, to subscribe would constitute prospectus, or offer document,” he says. 
    
“Most of these schemes that offer huge returns are Ponzi schemes. Hefty returns are not possible,” says Hinesh Doshi, vice-president of The Investors’ Grievances Forum (IGF), adding that the regulators need to step in to find out how these companies can generate higher returns. 
    
“Our company is not an investment company, and we are not accepting any investments or deposits from the public,” Shree Om Sainath said in its response to an questionnaire emailed by ET. 
    
“We are in the sale of membership of our company-owned resorts, hotels and apartments across the country, developed or under development,” the company added. 
    
But a call to the company had a marketing executive pitching for two schemes. One was the car scheme involving the Indica, while the other — investment in a resort — offered a return of Rs 8,040 per month for five years on an initial investment of Rs 1.25 lakh. 
    
A similar call to Metro Cruise, with a reporter from ET posing as a prospective client, had the company’s marketing executive detail three plans in retail, real estate and car leasing segments. 
    
At the City Group, super returns of four times the principal amount in five years is from investing in a sector like real estate, which is going through its worst patch in years. The regulators are still establishing where the responsibility of policing these companies lies. 
    
A Sebi official, who didn’t want to be named, says: “Is it an nonbanking finance company (NBFC), collective investment scheme (CIS), or is it raising fixed deposits under the Companies Act? If it doesn’t come under Sebi, then we can discuss the matter with the appropriate regulatory body and take action accordingly.” 
    
Meanwhile, these companies continue to press ahead with their marketing, with advertisements that promise assured returns and handsome profits. The ads claim that the money will be invested in various businesses, but do not give details of the schemes and the exact returns to avoid the scrutiny of regulators. From the time an investor puts in the money, the company starts issuing cheques to build confidence. This prompts the investor to rope in more investors, with some firms even offering commissions for bringing in relatives and friends. 

Source: The Economic Times, 16.05.09

9 comments:

  1. As Principle point of view you may be Right but fact is some thing else. City Limouzines, City Realcom is paying huge amount regularly and in time. Question of risk. It is fact that when there is no risk there is no gain. We must not forget about the equity market where so many retail investor has burn their hand. I am not aware where City Limouzines, City Realcom is paying but they are paying and even a single case of fraud has not been reported till date. So simply doubt that how they are pay so much high money is wrong. I have invested in City Limouzines, City Realcom and getting money in time. Investment in any money market is subject to risk. so spreading fear without any proof is not correct. About equity market I will say only that it is the market where money of small and retail investor is snatched because only the retail investor are looser in equity Market.

    Career News Of India
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  2. I agree that spreading fear without knowing facts is wrong. However what I do not understand is how can such cos offer such schemes & yet make profit. Further if these cos are so safe, why dont they approach any bank for finance where in emis will probably work out to well below 20% PA instead of approaching retail investor & paying nearly 50% PA!
    Kaltar's statement that small retail investors"" (sri) who loose on equity market end up loosing is incorrect in the sense that those "sri" end up investing without knowing facts. They enter the market at the highs & stay away when it is at all time lows. I have been an investor in EM for past 23 yrs & have seen EQ crashing every few years. Despite this I have not lost money over long term. Yes my portfolio value has gone down during crash & has also appreciated during the highs.
    In the long run if you invest wisely in EM I am sure you will not loose your savings.
    I am not saying that Metro Cruise or any other Co. is fraud. However Cos which offer such high returns should logicaly go bankrupt at some point of time!
    Raj

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  3. can you attempt the rationale or modus operandi of this scheme?

    yes this company is purely risk centric. If you wish to take 100 percent risk and invest you will get returns where no one can give, but they are giving the returns so far and if one cheque bounces then we can think of all this. no risk, no gains dear. if u r risk averse go to state bank, and get 20 paise returns.
    by saying this i dont recommend people to put all there hard earned money in this, try a small amount which u can afford to lose completely, but the chances are winning is really good at present and it may go on well for another 3 years, by which time ur money doubles.
    but do not loan and do stupid things and keep crying. i say this i invested in this scheme couple of years back and i have got all the money back. and now let us see what happens. but one thing i dont understand is how do they manage to do so for the last 7 years.

    one important thing here is dont try to understand the logic and how about, they are doing it quite nicely so far, and hope it is not illegal- but so far they have never failed. so dont say it is a network marketing. there is no need to refer to anyone. I have made few laks of investment and never advised or recommmened this to any one, becaz it is pure risk, which may make me look like nonsense. but they have paid all my money back and hope another couple of months gets through so that i can make real money out of it.
    but all i wonder is how are they able to give such returns. is it money rotation schemes, or any illegal activities going on is not known.

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  4. A investor after taking 60 instalments of rental car scheme and instead of Car if money is given to him it is not bad. And same person after eating the salt of the company than he is filing a case against Company and MD with ulterior motive from other company. A investor himself creating problem of crores of people who have invested in company. I myself have invested in City Limouzines and City Real com and from last Two years i am getting all the Checque credited. Except the Checque of 12 Aug 2009, Which is dishonoured. But i am not worried, I know other Company want to destroy this company, who are behind all this Episode. If Company also have same fate as others like Goldquest. It can not be because it is not a Chain making Schemes. I hope Company after all the enquery will start honouring their cheques. One thing you must remeber without risk you can not earn money. I myself is an Advocate at High Court but do not see nothing wrong in Company Policy and its strength. because it is a centralised Sytem working. Hope for all the best.Do not think much more, because i am relaxed by knowing that whatever i have earned in 20 yrs, all i have put in this company. If it has to go , it will go. But Hope for the best.
    Zulfiqar Ali Khan
    can contact me on: zulfiqar1971@gmail.com

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  5. Simple equation is as follows. On a investment of 1.25 laksh the comapny takes a loan of 2 lakhs from the bank and buys a car. The car is let out for taxi which ears approximately 1500 per day. Say 32,000 per month approximatley. Pay 4000 to bank for the loan and 7700 to the investor which makes a clean 20,000 profit for the car leasing company. Remove 2000 as expenses per car and they still have 20,000 per car as profit. The who has written is a certifed fraud and has no brains. He is using this to blackmail the money and make some good money.
    The banks are also making such profits. However they are over staffed and moreover are enjoying huge salaries, 2 house bulding loans at 2% interest, car at company expense, big offices, and pension for themselves and spouses at the cost of investors money

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  6. Now Fraud has come in the front, all PDC given by city limouzines are bounced & no body is picking the from any where in the country.

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  7. Hi All,

    Thanks for all the comments and responses to the article above.

    I had not responded to any of the comments till date because as a forensic professional I can comment on facts not to speculate. This proves a point in the main article that " Regulatory Issues are indeed a problem in India " whether we like it or not. No one knows or is aware of this.

    Secondly on business module of City or its similar profile companies. By way of professional skeptism such schemes are doomed to fail from start. The only Question is When ?? Ma doff scheme worked for a decade due to economic boom today all is gone within snap of finger..Issue with City have started to show up.. and let's see where it ends up

    The initial article was actually a Tip for our " janata & praja" to wake up and smell the fish...

    The fundamental every citizen must know that " Things that are too good to be true (in financial world at least) never are ".

    There is no point blaming others/government etc.. It is we who fell for the mirage...when we should have been careful.

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  8. Mr Nikhil
    I m fully agree your comment over the such companies, city limouzine has set an example to shut off his work over night, and innocent investors are helpless to take legal action against this company. now shree om sainath is in the que for which city limouzine has comeup, but the public who faith blindly untill they wont drilled out the situation.i dont know why the public dont thing once, that money cant grow on the tree, and those who are offering such plantation are just making fool to us. please my humble request to all thing they are just ponzi schems,they collect huge money setteled down in another country, and leave us to in helorious situation

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  9. Dear Nikhil,

    I have gone through you entire article and the comments so on and have also seen your good profille. But I have few questions to all and to you specially that not only these companies but all the companies are doing business at high risk and getting the new people is the source of income, You can observe if Mahindra vehicles are not sold than mahindra will have to shut down one day and all the people those who have invested will also loose money, hence the sucess of business is only when you get new clients, one more things can you make me understand how insurance companies are paying their claims, how the mutual funds are giving 36% per annum and they also show 3 years statement of returns in support of,inspite of the fact that their balance sheet show hughe amount of losses, all the companies are offering returns to their clients but the only difference is they give returns in kind, like bank says you purchase anything on our card and you get cash back i.e. what they are giving from our money and there are many more examples.

    Anyway I know these questions cannot be answered hence there is only one fuda, i.e. high risk high returns and everyone who is investing knows this fact well in advance.

    Thanking you

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